Stay On Top of IRA Withholding Notice Requirements
Staying ahead of IRA rules and regulations can feel like you’re aiming at a moving target. Financial organizations that serve as an IRA trustee or custodian are tasked with many responsibilities to maintain compliance. One of those responsibilities, which can carry hefty penalties if an organization is found to be noncompliant by the IRS, involves federal tax withholding requirements on IRA distributions.
Financial organizations must notify their clients who take IRA distributions of their right to make, renew, or revoke their withholding elections. This notification must take place at different times during the year, depending on when IRA owners take their distributions. If they take no action after receiving this notice, their withholding election on record will remain in effect. If they do not have a withholding election on file, then the financial organization must apply the default withholding rate (i.e., 10 percent for nonperiodic distributions).
If an IRA owner takes distributions quarterly or more frequently, financial organizations must provide a withholding notice only once per year at a reasonable time before the first distribution each year.
IRA owners who take IRA distributions less frequently than quarterly must receive a withholding notice no more than six months before each distribution. Financial organizations often satisfy this requirement by sending semi-annual notices to clients, usually in January and in June. By mailing these notices twice a year, organizations ensure that no matter when their clients take distributions, they are likely covered.
Financial organizations can receive a $100 penalty per failure, up to a maximum of $50,000, for not timely providing withholding notices to clients.
As part of this requirement, financial organizations should establish a master file that documents each withholding notice mailing. This file should contain a dated copy of the notice and a list (paper or electronic) of the IRA owners who received the notice.
Be Sure to Send the Right Withholding Form
Financial organizations were required in 2023 to start using the new Form W-4R, Withholding Certificate for Nonperiodic Payments and Eligible Rollover Distributions, or an acceptable substitute form. Form W-4R is used to capture withholding elections for nonperiodic distributions (i.e., on-demand distributions) and eligible rollover distributions. With this new form, IRA owners can now elect to withhold less than 10 percent. Previously, IRA owners could waive withholding, or withhold 10–100 percent of the distribution amount.
With the introduction of Form W-4R, the IRS also issued a revised Form W-4P, Withholding Certificate for Periodic Pension or Annuity Payments, which is now used to capture withholding elections for periodic distributions (i.e., annuity or similar periodic payments).
Need Help? Give Us a Call
If your IRA department is short-staffed or overwhelmed, and you’re unsure if you’ll be able to meet your withholding notice obligations, Ascensus is here to help. Ascensus will mail an IRA Withholding Notice and Election form twice a year to your IRA owners and beneficiaries who are receiving scheduled annual distributions. Our streamlined process eliminates stress and errors, reducing your risk of noncompliance.
Ascensus is now accepting subscribers for the December 2023 mailing. Let us take this IRA reporting responsibility off your hands. We know how to navigate all IRA withholding rule changes, including form updates.
Contact customersupport@ascensus.com to learn more about this mailing service.
If your organization is a Fully-Administered Program client, call 800-356-9140, or select “IRA Withholding Notice Mailing” from the Maintenance Tools section on the IRAdirect® homepage to enroll.
